Q2 2020 Spin Master Corp Earnings Call
Good morning, My name is key show and I will be your conference operator today at this time I would like to welcome everyone to the spin Master Corporation's second quarter results Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
If you would like to ask your question. During this time simply press Star. Then then number one of your telephone keypad. If he would like to withdraw your question press. The pound key. Thank you Ms. Sofia buses gives you may begin your conference.
Thank you key show good morning, everybody and welcome to the Masters Financial results Conference call for the second quarter ended June Thirtyth 2020, I'm joined this morning, Barbara then Harare co CEO and Mark Siegel been Masters Chief Financial Officer.
Your convenience the press release Mdna, an unaudited intern consolidated financial statements for the second quarter 2020 are available on the Investor Relations section of our web site at the Master Dot Com and on SEDAR.
Before we begin please note the remarks on this conference call may contain forward looking statements Didnt Dr. Chris.
Future plans expectations intentions was all levels of activity performance goals or achieve mid or any other future events or developments.
We're looking statements are based on information currently available to management estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances.
However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results could differ materially from those expressed or implied by the forward looking statements.
As a result spend lots of cannot guarantee the any forward looking statements will materialize and you are cautioned not to place undue reliance on these forward looking statements.
Except as may be.
Required by law spin Master has no obligation to update or revise any forward looking statement, whether because of new information future events or otherwise.
For additional information on these assumptions unrest. Please consult the cautionary statement regarding forward looking information contained in our earnings release dated August 2020. Please note that's been must a report in U.S. dollar all dollar amounts to be expressed today are you with currency I'd now like to turn the conference call over to it I think Sofia good morning.
Thanks for joining us today on behalf of spin Master I Hope that you are staying healthy and say.
We're incredibly proud of our team remains committed to really is unprecedented times, we're making meaningful progress towards resolving or operational challenges and the same time mitigating the impact quoted on our business and our customers.
Cobot has brought our people together for a global companies such as ours.
Many areas increased productivity collaboration and creativity.
This quarter reflects our commitment and the power having built a diversified portfolio Brown entertainment franchises and digital games.
In Q1, we felt the impact cobot on our supply chain Asia and through retail shutdowns towards end of March throughout the entire second quarter. We felt this that's at both the retail disruptions caused by cold and a significant number of customers were shut down we're in online only mode as well as the supply chain.
Disruptions that began in Q1 in Asia.
In the second quarter families with kids.
Oh from school continue to look for ways to keep them engaged and toys and games or an ideal way to do so.
As a result early part of Q2 was dominated by sales to stay at home activities as well as outdoor which grew significantly later in the quarter.
Our gross growth product sales were down 10.9% in Q2, which exceeded our expectations.
Sales in North America were up slightly as our largest customers remain open quarter.
We saw strong demand for home based products from our activities games and puzzles outdoor segments all the with grew in the quarter.
Global toy industry, Pos grew double digits in Q2, highlighting the resilient nature of the industry, especially the value toys as low priced at him for kids.
One other forms of entertainment or unavailable.
Mark will provide you with detailed Pos data in a few minutes.
We remain unsatisfied with the level of our profitability due to both impact coated.
And the carryover of the challenges we experienced in the second half 2019.
We are focused on improving profitability of 2020 progressive and into 2021.
Cobot has led to a series of rapid and dramatic changes in how we conduct business.
Top priorities remains the health and safety for our team and we instituted several protocols and true there say well also roaming productive and work from home environment continued to balance multiple dimensions are both response.
I want to employees wellbeing and safety workforce engagement and productivity business continuity in health and finally, ensuring that we continue to live up to our core values.
Currently many of our office around the world that reopened in China Vietnam.
Our offices are fully operational in Hong Kong, and India or offices are in a work from home mode and in Europe. Our offices have now opened with employees rotating between office and home.
In North America, or trying to a new York offices have opened in a phased approach with an emphasis on functions such as product development attaching we're touching the physical product is beneficial.
In L.A. in Mexico City College Kids remained elevated or offices remained close.
Situations fluid and we are prepared to readjust quickly to changing circumstances.
As a result of cobot outbreak in China in or first quarter were 60% to 65% vermin back half is located we saw some disruption in product flow through Q2, but our Asian supply chain team did an outstanding job at limiting the impact in Q2 as much as possible.
From a manufacturing perspective, we are currently operating at normal capacity for the second half of Twentytwenty.
When we sell approximately 70% of our annual volume and do not expect any material coal that related supply chain interruptions.
It is now being nearly five months since consumer demand for products was affected by coated.
Stay at home protocols meant that many of our retail customers were close for the entire second quarter.
Given this disruption we are fortunate to be operating in an industry that is that as help held up better than originally expected and better than many others.
We believe the macro trend the family spending more time at home with their children, coupled with the fact that cannot spend on movies theme parks in travel, that's helped or industry and lifted certain categories.
Categories that benefited from people spending time together continue to be in very strong demand.
Including games, and puzzles and arts and crafts.
According to NPD game, because this is the fastest growing super category in 2020.
This category is going to focus of ours for over 10 years, where the number two player in industry with a 4% U.S. market share.
In addition to games and puzzles activities category performed extremely well as we continue to see exceptional sales increase in kinetic sand.
Entire line benefiting from stay at home guidelines.
POS grew triple digits, this quarter with existing and new customers discovering the enlist creative possibilities and sense replay the kinetic sand provides.
We believe that demand for these categories continued to be strong throughout 2020.
Whereas games puzzles and activities are benefiting from a pandemic environment other categories across industry suffered in Q2.
Purchases driven by school, social activities and replay environments, including events, such as birthdays have declined giving kids as more limit or opportunities to socialize.
Most significantly impacted is the collectibles action figure category, which as a super category has declined 18% this year according to NPD.
However, we are seeing these categories begin to grow as stores and communities we opened in various geographies.
From a channel perspective, we're fortunate that in North America, which represents over 60% of our growth product sales Walmart target and Amazon continued normal ordering patterns specialty in other retail closer shifted buying towards these big box retailers and push shopping online.
The strong surge we saw in Q1 and E Commerce continued throughout the second quarter.
We estimate that approximately 20% 25% of our total sales in Q2.
We're through ecommerce channels and expect us to the over 30% in Q4.
Our global scale with 28 offices around the world combined with our diversified innovative product capabilities as represented a valuable asset in the current environment.
Cobot does affect geographic regions in different ways and at different times.
While we saw dips in consumer traffic in summer markets during locked down periods other returned to normal consumer behavior minimizing the overall impact.
We encourage you to think of spin outs are not only as a toy company, but as an integrated entertainment business, producing toys entertainment content and interactive digital toys and games.
[noise] with kids at home, all day and parents being more flexible screen time, we've seen a strong increase in the demand for entertainment for our entertainment content and digital gaming.
Our entertainment team is working with our third party animation studios keep production of all our TV shows and movies on schedule.
Much easier to keep on track with animated content, which lends itself more to work from home environment as compared to life actually content.
In late June the first episode of the New Copco theme for 2020 Dyna rescue premiered.
In the two to five each category, we garnered strong ratings and with voice specifically, we saw the highest ratings system might cost special in January.
We're very pleased to see that Premier also attract older audiences in the six to 11 age category, which bodes well for a movie release next year.
Overall pop pros diner rescue ranked as the number one show on television in Q2 amongst preschoolers, we remain on track to deliver the pop from movie in August 21 as planned.
We continue to build our library content, including an exciting new preschool franchise might express, which will debut on Netflix. This September 20 seconds might express the to the castle cranes and kids and expansive world filled with amazing debentures.
This launch is another example of our ability to push the boundaries of quality children's entertainment.
Might express, which represents an evergreen play pattern that has resonated with kids worldwide is our biggest production to date and marks our first series launching directly on a streaming platform.
But express toys will launch in fall 21, following the global Entertainment rollout.
It might expressed launch marks our shift for us.
As we will as we are taking a full franchise approach and we will hold rights all consumer products not just toys.
Franchise strategy will allow to improve the mark as we make on non non point licensing and merchandising revenue streams.
In addition, we procure global mass tort license for Dreamworks animation, the new animated preschool series gap is dollhouse, which is set to debut globally on Netflix later this year.
Beginning fall 21, we will bring the characters from a show to light through a new toy line that will include Playsets figures plush games and puzzles galleries and exciting addition to our growing portfolio and we continue to focus our strategy on establishing ourselves as a global leader in the character based preschool category.
Our digital games offering, including total Boca and Sacco. Many continued to experience significantly increased demand with parents looking for ways to educate and entertain their children at home.
[noise] Coca Boca now has over 22 million monthly active users and Seigerman now has over 185000 subscribers from the cycle. Many world settlement school and cyber many subscription box platforms compared to just over 100000 in Q2 last year.
In early 21, we're planning to launch a new token Boca subscription box targeted at five to nine year old as well as our first multiplayer game token days.
As part of the bucket on franchise in November we are launching the buttons on champions to destroy the new game for Nintendo switch in conjunction with Warner Brothers and game developers wait for.
I want to briefly update you on the operational challenges, we encountered last year and Mark will add more details later.
We're already seeing the benefits of the remediation efforts, we discussed in Q1, and we are gaining momentum.
We focused on consolidation realignments and simplification, while ensuring we remain sufficiently agile to respond to the evolving industry and retail environment.
One of the issues. We had last year was that we created increased complexity by stock in the same skews in multiple locations.
We have now implemented a one SKU one location strategy.
Our goal is to improve operational efficiency to the point, where the run rate of our cost structure.
So to the level, we saw in 2018.
We've used the process of addressing our 2019 operational challenges to build the continuous improvement mindset, which has become embedded in our organization globally. We plan to continue to drive operational efficiencies in every area globally.
We're doing deeper and more proactive plan for 2021 earlier and more detailed than ever before.
We've also improved accountability over every line of TNL and are building operational procedures to ensure that we manage more consistently hopefully.
We're always going to look at for accretive M&A opportunities to support our organic growth strategy. We continue to apply a disciplined approach to assessing all opportunities in toy area with industry remains highly fragmented beyond the 10 largest manufacturers pressure on smaller suppliers supports our view that there'll be opportunities over the next one to two years.
We're also increasing increasingly focused on our entertainment digital areas for M&A opportunities.
If we execute properly our operational efficiencies combined with our capital structure and our M&A strategy will allow us to reinvest cash we generated into the business were to accelerate growth.
From a market perspective conservative given rise several challenges in consumer behavior, some of which we believe will be enduring and which are influenced influencing our strategy.
Personal safety will play an important role in the future consumer behavior as consumers look to lessen the amount of time, it's been shopping in stores.
We anticipate more control foot traffic in stores shorter more mission focused trips potentially without kits and fewer opportunities for impulse purchases in store.
We are seeing more apparent driven decision, making from the ship E Commerce.
We expect the shift ecommerce to continue and to represent around 30% or more of Q4 Pos.
Many customers, we setup accounts with online retailers will likely find easier to continue buying online.
According to industry Reacher Research post co bid, 69% of shopper is expect to shop online and pick up curbside, 64% expect shop online and pick up in store and 37% expect shop online for home delivery.
Click and collect has become an increasingly popular method of purchase and toys that.
This is helping Walmart and target and particularly drive growth.
So what we've done a growth will have shoppers more focused on value efficiency with greater sophistication in online buying in price sensitivity.
That's good news for deep discount and big box retailers that offer products from a wider range of categories at lower prices.
We have observed an increase in screen time, where the content is being consumed continues to shift away from linear TV towards Espod gaming and you too.
Linear TV ratings are down 29% year to date in or expect to be down over 30% for 2020.
In response to all of the above we want to create a seamless shopping experience using digital tools and data to gain better insight on shoppers and guide them through the path purchase.
We will focus more on parents gift givers and shoppers were sharper focus messaging in store and shopper specific digital social and search marketing cribbing driving to E com.
Our fall marketing mix, we'll see what we'll see lower spend on linear TV and an increase in our mix of digital comprising social Influencer and ecommerce. In addition, social distancing measures have resulted in fewer physical gatherings, which in turn have decreased Ari spiritual marketing spending.
Not only have we shifted spend we've also built internal capabilities and deep expertise and change our approach to increase productivity. We've done this by moving our digital buying in house and establishing new marketing grow teams focusing on D to C and our spin channel network.
Finally, we will build flexibility in real time, OPSM optimization plans into our strategy to allow us to shift.
As needed.
These challenges of physician does create marketing as as innovative as or toys entertainment and digital games, which we'll see come to life. This fall.
Looking forward to the fall season from a product perspective, we are excited about our innovation across multiple categories. The RC team has several innovative items, including the animal motorized truck that inbox itself, and which kids can repeat over and over as well as the new monster Jan negligible on store RC truck for both land and water.
Our revised team has developed patch most crystal Flyers Hashman pixie that a kitten flying probe with their hands activity can team team continues to raise the bar on the DIY why products and building on the success of go glam Neil Stamper, which we are launching a new deluxe version.
This call the toy line from a new cost control.
Don a rescue team, including the Dyno controller, our first ever motorized preschool vehicle has been very well received by retailers.
This innovation complements our existing strong and diversified lineup, including Buck the gun kinetic sand gains and puzzles monster Jan DC outdoor and many others.
To conclude we remain very confident in our ability to create excitement and magic for children globally through the strength of our diversified portfolio products brands entertainment franchises and digital offerings.
However, we.
We need to balance our confidence against critical macro unknowns, including a potential second we had cobot uncertainty of spending around us election, and the duration of fiscal stimulus packages in our key markets.
Overall, our strategic direction, our solid financial foundation and diverse geographic platform combined with commitment of our global teams positions us to take advantage of the evolving opportunities and drive long term success.
I will now turn over the call to Mark.
Thanks for NIM.
Looking back to when we spoke in may 2nd quarter sales on demand came in stronger than we expected.
Gross product sales declined by 10.9% in the quarter to 282.2 million, which included a favorable foreign exchange impact of 3.4 minute.
On a constant currency basis gross product sales declined 12%.
We generated revenue of 281.1 million, ending Q2, which was down 12.4% from the same period last year and down 13.4% on a constant currency basis.
On a geographic basis, North America was the strongest region with gross product sales of 200, Pullman up slightly compared to last year.
This was a strong performance under the circumstances.
As we noted we saw continued shift away from collectibles and action figures in favor of activities and games and puzzles.
Growth in North America was led by games and puzzles kinetic sand outdoor and DC license products.
Offsetting the strong performance from these brands with declines in Dragons had terminals, but coogan pull control and gun.
In Europe gross product sales declined 21.6% to just under 50 million and then the rest of the world gross product sales declined 42.4% to 28.5 million.
Many of these markets will launch a negative impact on consumer activity as a result of covered the North America for two reasons. Firstly, many to not have sufficiency broad ecommerce adoption to offset store closures. Secondly, many of these markets have a much larger specialty toy component compared to North America, we mass retailers a more.
Dominant.
Although product lines, including Bakugan Dragon's Inn patrol when most significantly affected our newly launched DC line, partially offset this weakness.
In the quarter International gross product sales represented approximately 28% of total gross product sales down from 36% in 29 team the relative strength in North America to recover it was the key driver.
The activities kinds of puzzles Unpledged segment led our gross product sales growth for the quarter increasing 19.2%.
According to NPD, the U.S. games, and puzzles market was up 46% year over year.
We benefited from this with particular strength cannot cardinal games puzzles portfolio.
Activities, we are seeing exceptional growth in kinetic sand, which doubled this quarter over last year flush which comprises gunned has however be disproportionately affected by coveted since its business is largely driven by you a specialty stores most of whom we're not open in Q2.
Gross product sales in preschool and girls declined by 22.9%.
Patrol, which was down for the quarter remains among the top 10 properties and the total industry, but it was under pressure from the covered driven reduction in birthday parties and other events driven sales.
We're currently seeing this thought to shift and I will provide details on patrol Pos performance shortly.
We saw a significant decline in gross product sales in the boys action and construction segment, which was down 30.5%.
As Rick noted and as we called out in May the industry wide shift towards stay at home games puzzles and activities came at the expense of other categories, most notably action figures uncollectibles, which rely on social interaction.
The decline was driven by Dragons, which was expected as its in a post full year as well as Buck is on partially offset by sales of DC license products and tech.
The remote control and interactive caring to segment continued to decline and was down 25.4% driven by lower sales of had animals Juno and love Abella.
These declines were partially offset by increases in wants to Jim RC and poor patrol RC once the jam RC was up despite large scale live event cancellations.
Gross product sales in a outdoor segment rose by 9.1% as parents looked to get the kids active outside Andy pools and on beaches as the weather warmed up.
Let's now look at Pos.
The global toy industry grew mid double digits in Q2 globally Alfio is in Q2 exceeded the industry growth rate and was up 18%.
We're very pleased with this performance as it demonstrates that our brands are resonating with consumers and is a testament to our product diversification strategy.
In the U.S.
POS for Q2 rose, 23% in line with the industry growth rate.
Looking at H., one according to NPD Pos for the global toy industry grew 9% globally, our H, one Pos was up 14%.
In the U.S., our Pos for H., one was up 15% compared to 60% for the us industry. However.
If the outdoor in sports category, where we have a limited presence relative to the size of the industry is excluded our Pos was up 15% and industry was up 11%.
Industry Pos is strong but retailers are remaining cautious replenishing inventory, resulting in Pos exceeding shipments and retail inventory levels being drawn down.
In the second half of 2020 as is typically the case, we expect to see a rebalancing between shipments in Pos as retailers replenished channel inventory.
Scale of this replenishment will likely be affected by macro factors, including global back to school decisions, which could emphasized stay at home and educational play categories, especially if online or hybrid school models emerge.
In the U.S. pull patrol Pos recovered in Q2, two negative 1% from negative 17% year over year in Q1, and reducing the year to date decline to negative 10% year over year.
The ultimate five truck performed well with Q2, Pos growing 12% year over year.
In store displays at Walmart and target supported the recovery in Q2 as more customers returned to stores.
Outside of the U.S.
Paul showed Pos growth in Q2 in markets, such as France, Benelux and Australia.
Patrol is currently rebounding strongly with high teen Pos growth in most markets.
Kinetic sand continues to show triple digit year over year Pos growth.
And we're starting to see an overall strong rebound in European Pos, especially in France, the UK and Germany, driven by growth in pull patrol and other core brands.
We are fortunate to have strong retail partners, such as Walmart target, an Amazon, which remained open during the worst to lock down at a picked up a launch a share of consumer spending targeting Walmart comprised approximately 50% about global volume in Q2, including Amazon Our next largest customer globally.
Three represented 60% of global volume in Q2.
Turning back to the CNL sales allowances increased to 10.5% of gross product sales compared to 8.3% last year.
The main driver of the year over year increase was high and noncompliance charges from customers related to our 2019 performance issues. This was offset to some extent by shifting geographic sales mix towards North America, which has a lower sales environment sales allowance environment.
Although these charges are higher compared to Q2 2019, we're steadily making progress in remediating. The underlying causes of these charges and are seeing significant sequential improvements all the Q1 when sales allowances will over 50%.
Noncompliance charges are a key part of our efforts to improve operational performance in 2020 and beyond.
On a year to date basis sales allowances or 12.7%, which is approximately where we expect to be for the full year.
Other revenue, which primarily reflects licensing and merchandising royalties television distribution revenue an AD revenue declined by 2 million or 6.3% in Q2.
Decline resulted from lower licensing and merchandising royalties, which was offset by increased at revenue from talk about contango. Many as we continue to ramp up our digital games business.
Gross profit for the quarter was 118.2 million or 42% of revenue compared to 164 point Threemillion will 51.2% last year.
The declining gross profit margin arose from several factors.
Hi, a sales allowances as I just described unfavorable shifts in product mix from increased volumes in lower margin projects fraud products, such as Cognos games and puzzles.
To close out of non Carey Ford products at lower margins, such as marshmallow furniture older games, and puzzles and hatch most lines as we realigned inventory as part of our operational improvement initiatives.
We also incurred cost to supply is related to procurement commitments that will may 29, chief.
Finally, we had high inland and ocean freight expenses this quarter compared to last year, which related to inventory purchased in 2019 and sold in 2020.
Overall, we estimate that in Q2, approximately 13 million of the 46 million dollar decline in gross profit relates to inefficiencies arising from the second half 2019.
They will continue to be an impact to gross margin in h. to 2020 as a result of our ongoing inventory clean up however, the scale of the impact will decline in H. too as we ship out full line, which should more than offset any compression.
As our operational performance continues to improve we expect gross margins for the second half of 2020 to be inline with prior years.
As gionee as a percentage of revenue declined to 40.8% in Q2 down from 42.9% last year.
The biggest driver the decline was a 14.1 million reduction in marketing costs due to lower spending as a result of code.
As a percentage of revenue marketing decreased to 4.1% from 7.9%.
We spent less on both traditional media experience, a marketing and trade shows.
Offsetting this were increases in Influencer and E commerce marketing spend.
We intend to increase our marketing spend in H. too and expect marketing spend for the second half of 2020 to be higher compared to 29 team.
Selling expenses were lower in absolute terms, but high as a percentage of revenue due to an increase in the sales mix of licensed products.
Warehousing and distribution expenses were 18.8 million or 6.7% of revenue up from 16.3 million or 5.1% last year.
The increase relates primarily to higher freight relate to the warehouse handling charges as part of our ongoing operational improvements initiative to ship one skew out of only one physical warehouse location.
These transfers of inventory between Dcs in the U.S will not reoccur in nature too as we are not now largely set up to successfully execute our distribution strategy.
In Q2, our adjusted net loss was 9.5 million will nine cents loss per diluted share compared with adjusted net income of 19.8 million or 19 cents per diluted share last year.
Adjusted EBITDA was 21.5 million compared to 55.1 million last year.
EBITDA margin was 7.6% compared to 17.2%.
The decline in EBITDA was primarily driven by lower gross profit offset by marketing savings.
We estimate that approximately 15 million of the 34 million dollar decline in EBITDA in Q2 relates to inefficiencies arising from the second half 29 team.
The tax rate for the quarter was adjusted to reflect our full cost to tax position for 2020, we expect the tax rate for twentytwenty to be 15% well below our normal rates of approximately 26%.
Driven by the results for the first half of 2020 and the jurisdictions, we expect taxable income to be earned for the remainder of the.
For 2021, we expect to revert to a historically the effect of right.
From a capital allocation leverage and liquidity perspective, we are in the strong position our balance sheet remains in great shape. We ended the quarter with just over $410 million in cash with net cash of over 110 million compared to 77 million last year.
In the first quarter, we drew a total of 350 million on our committed 510 million revolving credit facility in during the second quarter, we repaid $50 million.
We plan to continue to pay down more in Q3.
Given the amount of cash on hand at the end of the quota the cash flow, we will generate an h. too and the capacity in our credit facility. We are very solid be position regarding available liquidity.
Net working capital was 173.5 men at the end of Q2 down from 222 million last year.
Free cash flow for the quarter, excluding changes in working capital was negative 9.8 million compared to positive 18.6 million last year.
However, free cash flow for the quarter, including changes in working capital was positive 40.2 million compared to negative 34.7 million in nearly 75 million dollar improvement in free cash flow.
Inventory was 154.3 million compared to 195.3 million at the end of 29 team and 145.4 million last year.
We are beginning to make meaningful progress reducing inventory levels, although our progress was handed to some extent by cobot as some outlets for sales were closed through the quarter.
We are constantly weighing gross margin against inventory and the benefit of reducing inventory carrying costs and improving cash flow.
Let's now turn to our efforts to improve operating efficiency in Q2, we generated strong momentum towards remediating. The challenges that emerged late in 2019, and we have begun to see a decline in the elevated cost levels from Q4 19 in Q1 20.
We made significant progress in reorganizing and simplifying the strip the structure of our North American Third Party distribution Center network.
In North America, we began the year with 18, Dcs and storage locations as of today, we are at eight and we will close a further to by the end of Q3.
By the end of 2020 will be down to a steady state number of five dcs forward into us and one in Canada.
We have also significantly improved our sales and operations planning processes as well as our freight management processes.
Goal is to ship more cost effectively and manage inventory flow to minimize storage requirements. We have focused on rebuilding our operations in IP teams and improving internal and external cross functional Keller collaboration.
Along with the leadership changes made in Q1, we continued to strengthen these teams.
We have now implemented our customer focused teams strategy. These are customer first internal hubs focused on a single large custom mobile customer group and comprise a blend of dedicated sales order management demand planning logistics and credit management team members, all focused on serving a customer or group of customers.
These teams are ready to serve our customers as we enter how seasonal shipping peak.
I want to now turn to the balance of Twentytwenty.
We have made significant progress aimed at driving structural cost savings and improvements to get operating margins back to where they belong.
Overall goal is to spend more judiciously reallocating overhead spending two proof efficiency and redirecting marketing spending to brands most likely to exhibit strong sell through in the current environment, all while we prudently manage discretionary spending.
Our goal was to into Q3 with a more fun supply chain infrastructure and to exit 2020 at a normalized warehousing and distribution run rate.
We are on track to do this.
Although we are encouraged by the strength of our Pos across almost the entire product line and by the progress we have made with our operating improvements we're not providing formal guidance at this time several affect US drive this decision, including the fact that many parts of of the U.S. our largest market continued to see rising cases of covered.
2020, as a presidential election year in the us and a posture as in which the has bina hotly contested election consumer spending often slows until after the election.
In addition, we also mindful of other variables such as possible tariffs the level of retail store openings, especially specialty stores and physical E Commerce channel rebalancing, which may impact the timing and mix of orders and replenishment.
We will therefore hold of providing a detailed outlook for 2020 and beyond until a clearer picture emerges.
That said, we believe we have an exciting innovative product portfolio and very strong entertainment and digital bank content, how solid financial foundation and diversification has allowed us to with a challenging nine months. We've made significant progress on many fronts and believe we are now in much better shape to handle.
We'll seasonal second half volumes and we have both an asset lot platform capable of generating sustainable long term growth.
That concludes our formal presentation remained an eye on now happy to take questions. Operator, Please open the line.
At this time I would like to remind everyone I feel like to ask a question Press Star then a number one on your telephone keypad, we'll pause for a moment to compile the Q and a roster.
And our first question comes when you're dealing with Canaccord genuity.
Thanks. This is Luke on the line for Derek.
First question.
The sale blouses, obviously came in much lower than what we expected.
I guess just broadly speaking are those noncompliance charges largely behind you not at this point.
Yes, we've made a lot of progress one remediating the underlying causes to those noncompliance charges.
As you saw that were extensive in Q4 and in Q1 as well.
That now trending down and we believe we are well positioned operationally to execute well and if we do that then the noncompliance charges will continue to decline.
Thanks, I also wanted to follow up on the color Mark that you gave on marketing expenses.
And how you expect that to kind of.
Accelerate I guess compared to relative to 2019 in the back half the year I'm just curious with obviously the trade shows and other events on that previously would've been brought in past years and not necessarily occurring this year.
I'm, just curious to know where.
Where you can maybe you can talk to where you expect those dollars on to be allocated across your marketing programs for the back after the year.
Yes. So so we held back overall on marketing in Q2 for obvious reasons as I've just described in my script.
We do expect how marketing spend in the second half to increase they will not be viewed things like trade shows and experiential marketing in the second half due to covered but we all going to be leaning in.
Into other areas, particularly digital and renew why didn't you why don't you described some of the activities that we're going to be doing in that area. Yeah, It's Luke right Yep.
Yes.
Our marketing for the third and fourth quarter are going to change considerably compared to previous years, we're taking a very.
We're taking a digital first approach to our marketing this year and.
The acceleration of the digital shopping as it's really it's moved US from 2020, almost 2030, we jumped 10 years on short amount of time.
And we're very fortunate that we were on the digital marketing Pat early on by making some key hires brings people in from Buzzfeed.
Persons, who runs marketing is originally from Buzzfeed and.
Realigning our team and thinking about our spends and so we've done some fundamental things like bring our buying in house. So we buy all or digital media in house and what that enables us to do is to make real time.
Changes to the creative when we see that the effectiveness of the creative is not working then we can actually change that on the fly and we can actually modified buying to match the creative.
The other thing is that in the past the marketing was traditionally spent on television or experiential, but now there's so much fragmentation in the marketplace, where it goes from linear TV to SBO D to video games to Influencers to you to to Facebook to Instagram.
Jim.
To roll to it just goes just goes on and on to Echo at Walmart too.
I think the target and so with that fragmentation. It it really entails actually doing the creative specifically for the actual medium itself and so traditionally in the past we would have.
One bit of creative.
And we use that across other across all the medium now creative is made specifically for the medium and you could have for one brand over 250 piece of creative made at a time.
And so thats really the iterative.
Agile approach to advertising and the interplay of digital buying that we brought in house.
You will see the.
The the effects of that this third and fourth quarter and we're we're looking forward to share more with you guys in future.
Understood.
Last one from me about pass the line.
Commentary that you guys gave about how patrol move you still on schedule to be introduced a year for now in August 2021, Im just curious if you've had any discussions internally were with your partners.
Maybe changing the distribution.
Method for that move you just given.
What's happened with over 90, maybe I'm going straight to add svod or something of that nature.
Yes.
We're still early.
The the production Fortunately because it is animation is on track and has not been affected by cobot that being said it is not easy on any of the animation studios.
Produced content for us so.
We really appreciate the hard effort that everybody's making.
By at work from home environment, but things are on track and currently right now we're still on plans to.
Deliver the movie theatrically and fall 2021, if you get closer to the time, we'll we'll evaluate some other options. It's a co but it's still persisting at this high level.
Thanks appreciate the comments.
And our next question comes from Adam Shine with National Bank financial.
Thanks, Good morning, maybe when first for you run and usually as we do you guys get through sort of June July you have your conversations with retailers heading into the second half speaking to you know you have a good sense of what they're thinking.
Can you maybe talk about or characterize how those discussions were.
Given the backdrop of co video.
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Offensive caution or with the reopening sort of cautious optimism in terms of as you alluded to the replenishment cycle that seems to lie ahead in the seasonal stronger period, and then maybe one for for you Mark just in terms of other.
Given some of the closures that existed and disruption on the entertainment side in the H. wide.
Can you speak maybe a little bit in terms of how age to other revenue should evolve the presumption being that we should see some some degree of growth going into the second half what other revenue. Thanks.
Hey, Adam nice to hear from him.
I would say that.
We're very fortunate as an industry, where our industry has held up better than than.
I personally expected and so we're very fortunate to be in this position and from a retailer perspective as we noted in our in her opening remarks that there are certain retailers are doing very well.
In in in these categories of goods.
But at the same time I would categorize it as cautiously optimistic you said it well I mean, there's still you know there they are buying and they're buying in and a healthy manner, but that being said they are cautiously optimistic and there's still some caution in the way they buy and how they buy.
So there are there I would say, they're being measured and I think that could bode well for for the overall industry and I think it could bode well for everybody because.
Retail could end up being very clean come the fourth quarter and said everybody up for healthy first and second quarter of next year. So it's almost like an opportunity to clean out the inventory.
Both ourselves and our warehouses and retail and stuff like that.
But I think they're looking for keep the rate of sale high inventory levels moving very quickly.
Okay I'll deal with I'll deal with the second part to Adam just to add 1.2 alternate just described you obviously appeal Pos results or significantly higher than 10 shipments right now and so that means retail inventories of being drawn down.
Every week that goes by.
Retailers are getting better line of sight to Christmas more data points and at some point, they're going to have to step being offset by the by the macro cautions that renamed just described but but overall.
We feel.
Domestic about that in terms of other revenue.
Other revenue as you know combines it comprises the licensing and merchandising income TV distribution income and.
Revenue from token cycle, So I think for the second half the year as we see a rebound in in poor patrol and other franchises, which we generate a lot of licensing a merchandising income from we should see a pickup in that I think it's going to.
Be tempted to some extent by the environment in which we're operating so we're not expecting to see a significant increase and so the overall I think other revenue will be down relative to prior years, but we are seeing strong increase in app revenue and revenue related to our subscription activities in token cycle. So there isn't.
Nice balance there.
Okay. So I'm sorry, just so just to be clear, which you think given the second half there's going be temper growth or an actual declined year over year and the other revenue like.
I think it will be a overall decline in other revenue relative to prior years.
Okay. Thanks, maybe just one follow up if you don't win.
Mark for you just you know in terms of what's happening in Europe, where there seems to be the lack of E. Commerce in terms of reliance wall. Their store closures is there a risk in regard to you know any bad debt or other concerns related to potential closures among specialty and other Reid.
Taylor's outside of North America.
You know the one thing Adam that we are seeing in Europe is that we actually or seeing a fairly significant shifting some of that key retailers towards E. Commerce that although the us in North America is way ahead of Europe in terms of they can capacity and capability. We are seeing that change very rapidly and so I'm actually quite encouraged by the way.
At the industry is shifting towards E commerce over there and I think it's accelerating very rapidly.
Having said that they will obviously, some very significant shutdowns in countries like France, and Italy, and in UK et cetera, and that has put the retail industry under pressure and also in places like Mexico. So we have seen an uptick in now provision for doubtful accounts just keep in mind that we all credit insured in all of our major markets we do.
I have a deductible.
Which is not covered and we also have some co insurance. So you we have seen an uptick but it's very minor and I would have no concerns from your end on any material bad debts or will impact to our receivables.
During.
The rest of the over next year, because we do have credit insurance policy in place for all of our major markets.
Great. Thanks, a lot for that.
Our next question comes from Gerrick, Johnson with BMO capital markets.
Hey, good morning.
So why Pos.
That's a pretty impressive.
Second quarter. So we'll give too excited just yet, but I wanted to be more specific on Pos.
Is this a clean number does exclude animals or something like that and doesn't include all your retailers top customers NPD what does it based on.
So Gary you're not in the past, we've we've actually always split up Pos, including and excluding had tools, we're not doing that anymore actuals is declining.
As us as part of that business. So the numbers that you're seeing all in.
And they include MPD and all other forms of data that we actually get so as you know MPD doesn't measure everything they're very extensive and we rely on them extensively in their excellent, but we also have our own other tracking mechanisms and so this represents how how numbers.
In terms of what Pos represents.
Okay, maybe if I go drill in a little bit more specifically since we are comparing.
Retail versus.
Retail pure was for shipments.
It could be a little bit apples to oranges, there because your shipments are to everybody and if you're Pos is only a slight so is your Pos covering 100% of your customers, 80%, that's what I'm trying to get out.
Yes, I actually don't have a specific number for you that says our POS covers an exact proportion of our our customer base, but you know obviously our shipments onto the whole market in the the Pos numbers that we have used to a large segments of the market, but it's not a 100% we don't get Pos from every single retailer around.
The world. So these are the isn't element of all the disconnect with that but I think that's true for everybody in the industry.
Oh, yes.
Definitely the MPD numbers are overstated, because you don't have those small specialty retailers included better obviously been closed and backlog, but now moving on.
The massive declines in international kind of mask real performance or sooner brands and I know Mark you talked about a couple of but you want to will quickly and I might have missed but can we talk maybe in terms of North America only.
Your performance of some of your key brands are most interested in like patrol backlog on how to small and engagement activities. How they performed both shipments in retail and North America only.
Sure in North America.
Are you talking about for the quarter.
Yes.
Okay.
Let me just to let me just refer you back to what we said so overall Pos in the U.S. was up 23%, Okay and you know in the US pull patrol was actually down 1% in Q2 from minus 17% in Q1 and overall the year to date declining.
POS is 10% currently we're seeing that that Pos even grow further.
You kinetic sand.
POS is up to triple digits, and really if you actually look.
What's happening right now and in the us.
Current Pos continues to accelerate we've seen continued strength driven by features at Walmart and target and the Dinos skews are beginning to set so thats driving Pos pull patrol kinetic sand remains a triple digit Pos growth Cardinal and board games and puzzles are showing high double digit growth Pos.
But took on POS has picked up to mid teens, it was actually lower than that in the quarter.
But cook on as you know was affected by cobot in Q2 itself Monster, Jim is showing consistent 20% plus Pos growth and B and Pos for Batman and DC is solid the negatives from a Pos perspective, or patching holes and Dragons, which are both down.
Double digits from a Pos perspective, and just one interesting data point, it's not material in dollars, but it just gets it should be showing very strong mid double digits Pos growth due to the introduction of al.
License lines, so thats, an interesting data points in one about acquisitions, so hopefully that helps you.
That does that's very helpful. I appreciate it and yes on extra sketch you've been seeing the big programs out there they look excellent.
One more for me.
Similar similar to lose question.
Looks like you do you see movies for next year, you know Batman I guess.
Our stock schedule source patrol how are you thinking about entertainments next year, because it looks like we're gonna have a huge logjam with everything moved into 2021.
Minions moved you stop Jurassic World, We still have Ghostbusters moved you have all the Marvel movies moved so how are you thinking about about those programs next year or does that give you some pause with all the other stuff cluttering cornering the landscape.
It's a good crescent your first of all Hey, how you don't.
Fair enough.
I would say I'd say with top pro I mean, there really is not a lot of offerings in the feature film area for.
The younger set so I think we really stand alone in that in that space and then when you look at things like.
The Batman and DC movies.
It's going be interesting you know, they're going to be you know tackling you know they're going to be fighting it out for for audience share and stuff like that but I think that when you look at the strength of the franchise itself. When you look Batman, it's such a strong franchise that it's holding up right now I'm not even in a movie year quite well.
I also put a lot of.
What's called the emphasis on the product line itself I mean, our team has put an incredible.
Program together and you see the result in sales themselves.
With the product and I think we'll do the same with an exceptional product line that will match the movie at at and the theaters. So I.
I think at the end of the day that the underlying property is extremely strong and product will match, it very well and.
I don't know whether or not at the sale is the theater receipts will be down a little bit.
Whether or not that will affect the overall sell through the line, but it's yet to be determined and you don't know whether or not you know there's lot of uncertainty. So things may move it continued to move and people may move their 2022, and and we don't know so we'll see.
Okay, great. Thanks, I think it's something we should drill down a little bit more you know probably on the next call or the call after that.
Okay. Okay sounds good thanks, guys.
Okay.
And our next question comes from John Garfinkle with Scotiabank.
Stepping in for George do Matt.
I just had a couple of questions and there's been a lot of lot more online salvage we have a larger impact on Q4 compared to Q3 I was wondering if you could quantify the new seasonality in terms of gross product sales in the back half the year.
Yes, so typically the second half of the comprises around.
70% of our sales and give or take a few percent either way and if you go back to the days with toys R. US was in existence.
Typically Q3 was around 45% in Q4 was around 25%.
With the growth in online with the demise of toys R. US we've seen Q3 decline and we've seen Q4 increase and I think we'll see the same trend this year I'm not going to give you specific factors or specific specific percentages, because we were not giving guidance, but I think you will see a shift towards more domestic.
We'll see a shift towards a larger Q4 as a result of more domestic.
Due to online just in time Tot buying then you have seen in prior years.
Okay, great. Thanks for that and just one more for me I'm. Just wondering if you could break out the percentage of the percent of gross product sales on a normalized environment than generated from specialty stores.
As a whole and they do by geography.
Yes, we don't break that out specifically, but I can tell you, it's actually very small how specialty businesses actually quite quite mine at Cindy low single digits in terms of our total volume I don't know what the exact number is but it is quite small.
Okay. Thanks, a lot.
And our next question.
And our next question comes from Steph Wissink with Jefferies.
I think I've been asked but I have two bigger picture question, Ryan if one looks for you.
It caught me off guard a bit when you talked about in your prepared remarks that profit more important than sales and profit versus sale and maybe just extrapolate a little bit on that reflecting that you are a large shareholder yourself.
Let's think through the balance of the agenda between kind of protecting profits in growing the business.
And then secondly markets ones for you I. It's also struck me that you talked about Mighty expressed as a ship to upsell franchise model versus what you have with all petrol can you maybe just walk us through some of the financial articulation of that just so we can go back and refer to the differences between the two in terms of how the financial structure to work to your benefit. Thank you.
Hey, Stephanie.
You know I think that at the end of the day, I mean growth and profitability have to go hand in hand.
They're just they're both there they are both equal and they're both important and us as a company you know, we we stumbled last year from a profitability perspective.
And we're working very hard to remedy that fix it and make sure that the company is set up from a profitability perspective first and foremost.
So that you when you layer on the growth and take the growth you can maintain the profitability at the same at the same time, So you know.
Don't don't Miss Misunderstand my comments.
In terms of growth I mean, we're constantly out there planting seeds and producing wants television shows and movies and developing new product lines and doing everything we do and.
Growing in the digital area, but everything has to be done in a in a measured approach. So that we don't give back profits at the at the end of the day. So it's it's managing the two and and I think you know.
Happy you had asked question because it's such a such an interesting interplay when you look at inventory and stuff like inventory at the end of the day you shipping a lot of inventory at the in the third and fourth quarter, but then you end up paying the price in the in the first and second quarter with markdown allowances and and things coming up.
Retail and then your Pos going down and your new themes can't can't get traction.
So we're really pushing the company to be.
Really a best in class operator.
On top of a best in class innovator on top of the best in class growth company and all three things combined together and I think it's a different skill set and I think the days when we went public in 2015 16, and we had to speak ride with patch malls and you know, it's hundreds of millions of dollars and stuff like that.
But it's a different company today when you are diversified any at 28 offices around the world and you have a company like games Division, you're selling plush company.
Now you have mobile studios in Europe, and in Canada, and your Entertainment office.
Production.
This is much bigger than was before and yet we more production is happening.
The company, just we more diversified and I think that just takes different mindset to operate and so I think we're we're on this.
Beautiful transition.
Two being those three things that I just described before.
And then just in terms of Medmarc I'll take the just in terms of might express.
In the way, we restructured patrol, it's really an amazing partnership with with Nickelodeon and Nickelodeon handles all the licensing merchandising and they do all the style guides the that although the partners.
They work with the partners. They do all the retail meetings for patrol they help promote the franchise itself and so what might express. This is our first foray into spin master managing the franchise.
First and foremost.
So we'll be producing the style guides will be actually.
Bring on all the various different licensing partners will be doing all the retail campaigns, you will see a in the fourth quarter third and fourth quarter a lot of spending.
We'll go to actually promote might express and drive viewers actually back to Netflix to watch the the the show and you'll see other other marketing activities plus also content activities to actually build up this franchise.
In in what I would say is.
A new point in time, how kids view content.
And so and as a result to that.
Staffed up and we have a new had a franchise.
Which is importing into Jennifer Dodge and we're beating out though.
We're building out the team and as a result of that.
We will be garnering a larger share of or a much bigger share of the licensing and merchandise revenues.
We'll be so fortunate that might express will connect with the consumer.
That's great. Thank you so much on him appreciate it.
And our next question comes from Subodh Khan with RBC capital markets.
Right, Thanks, and good morning, your comment earlier around.
Creasing marketing spend on some key brands through each to I guess should we assume that's primarily focused on patrol or are there other brands that you're looking to increase in reston behind over the next quarter. So.
I think that it goes across the pretty much the whole portfolios that [noise] you know as as Mark shared with you at the POS numbers, we're having good traction in the marketplace and to keep that traction going we're going to support with marketing across the board. So there is a.
The whole host marketing activities that are going to happen again as I mentioned.
Slightly different than previous years, because of all the digital shopping and the transformation to digital that's our society seeing but everything can be supported obviously there'll be more supported some larger franchises, but no monster jam backlog on activities games kinetic.
Optimal every month.
Okay, and then on your DC Comics agreements I guess, a licensing agreements that you have with Warner brothers and this is probably issue that's affecting the oil industry, but I guess, depending on how those timelines move and some of the minimum that you may have agreed to I guess is there room for some flexibility there as you move into 2021 and the outlook is somewhat unclear on the.
Movie release schedules and so forth.
Yeah, I think I think our if it moved into 22, it's still part of our overall deal with them. So I wouldn't see any risk there.
Several you're referring to minimum guarantees and advances and those kinds of issues.
Yeah, just exactly just on the economics of it yeah.
I think there's I don't know the specific details of the deal, but I think there there are great partners and I'm sure that there is some flexibility in there, but I would also say that would that be I [noise].
I can't speak to the specifics of the deal I think it's not probably appropriate on call either but I would say that.
I don't think it's an issue.
General and let's say Sabbah we.
We're aware of all of these issues with all of our license agreements Mgs.
The answer is whatever we will not currently seeing any major issues or concerns and and we have good relationships with people and if something was to need to be negotiated for whatever reason that I'm sure we'd have a reasonable business conversation, but thats not nothing that's like front and center right now in anyway.
Great. Thank you.
And our next question comes from Brian Morrison with TD Securities.
Hi, Good morning, guys. So for the interests of time I'll keep the short I'm just on the supply chain, where you've obviously made good progress.
I wanted to I want to understand when and just quickly you backup plans you have in place as you rationalize the footprint down to five at year end.
First of all Sofias, hitting our had because you're going bears the ambulances outside but I'm happy you guys are hearing because I know you know that we're actually in the office.
Brian I think that.
I would say that.
What we had before was was one of the most loaded.
Inefficient strange.
Warehouse and distributions setups I'm embarrassed by what we actually.
Grew into and we're going back to something that is what mark what Mark stated is something that we've had traditionally for many many many years.
I think if you look at us compared to our competitors.
It's very similar warehouse and distribution footprint, one in Canada, which has more than enough to cover the country and before that we have in the United States. Even for I think is is probably one too many but one that out there. So I'm I'm confident that we're going to the right spot plus also I can tell you this that the.
Partners.
Gauge, but more important than anything else engagement on our part so high now we have top to top relationships I have we have Seo Seo meetings with our teams and their teams with our whereas a DSP.
The CEO, we call than from from Europe.
Is there every two weeks on our meetings the C on our east coast warehouses, there all the time our freight forwarder.
Robinson Ceos are engaged so all our partners or more than our structure everybody's really engage in me and the integration between the teams is the highest it's ever been and our systems and our Eddie I set ups between warehouses and our visibility is far better than it's ever been before so I think it's I think it really comes down part of.
Structure and the one skew one location, which is really imperative, which simplifies everything for us.
And also the connectivity between our teams and our people and the collaboration and also the visibility the sight lines for the products coming in on the water when they're coming.
You know how many how many talents we haven't each warehouse pellet per per brand, what's going down we also have different things like.
Year end targets now so it's much more its very interlinked, but again just going back to your original question common, whereas I think that we're we're set up with with the right amount to service, our customers and get our customer levels back to where.
Or where they need to be and also.
Set ourselves up to a supply for the ecommerce world, which is really a becoming a big deal.
Got it so follow up then Mark just point blank.
You did say exit 2020 at normalized distribution levels is the message here that we should expect recovery toward normalized EBITDA margins in the back half of 2020, and then for 2021 to be at historical margins for the year or to achieve a run rate of historical margins in 2021.
[laughter] Brian.
You asked me a point blank question I have to give you a point blank reply, I mean, we're not giving guidance or I'd like we're not being that specific on guidance, but directionally, what you're saying is what we're trying to get too.
We've we've actually now positioned ourselves to be in a position to get back to normalized margins, but we have to execute and so really what it comes down to for the second half of 2020 for spin Master is execution I think we've done all the right things to get us to the to the point, where we can.
And execute to now we got to do it.
And so.
When we when we exit 2020 as I say to you before 2020 will obviously as a you're not get us back to where we want to beat.
But going into 2021, we want to be at those run rates were for 2021, we're operating at levels that you in the market have come to expect from us.
Excellent one last small ones in terms of the strong ratings at patrol.
Are you seeing any shift in the demographic demographics of your audience with the new theme there you've seen expansion of it with the with the Dyno added.
It's interesting it's I think that the answer is that the answer is yes, I think that the themes. If you if you watch and I encourage ever been caught watch.
The latest theme because it's amazing its slightly aged up.
Versus the traditional patrol show that we make.
And I think that that's actually a enables us to get a wide breadth of audience, where we can still capture some six to seven year olds.
It's find the themes I think the themes given the older kids some cover over their younger siblings, where Theyre, Washington themed version pop from versus washing the traditional pop troll. So.
I think the themes at the end of the day and things like the movies are enabling us to keep keep the fans into the franchise longer.
So I think the answer is yes.
Thank you.
And our next question comes from David My family Cormark Securities.
Hi, a couple of questions.
So that's your question you talked about arbitrage feature found I was just wondering if you could tell us.
What the level of capital is that rescue or are.
You can't get specific is one thing to be worried about.
Just given what we're seeing that theatrical market here with.
People pulling sounds and so on and then secondly gave us and outlook on the gross margin.
Expects or the second half the 2020, that's one can you give us something similar.
For the selling marketing distribution and product development expenses as a percentage of revenue.
Yes in terms of pop trauma Guy I.
I think that we're on track right now to finished the film and habits on ready to go to a ton wider audience.
We'll see closer to the time of the theatrical is the right option sport.
But what we're seeing in the marketplace. If you look at things like tools that changed their strategy last minute as a result, the cobot there were still able to garner audience share and also garner a lot of revenue as a result of it.
So other options have emerged as a result of co bid that give optionality.
For us for pop crawl.
And we'll look at the Optionality close to the time right now we're we're on track to theatrical and covered persist we'll look at all options, but the fans were going to the fans are there and the fans were excited to see something.
Like theatrical and the content is very different from a traditional TV show.
Yes, so again I got to be a little carefully subs are forward looking numbers, but if you if you look at.
Historical numbers and if you look at the breakdown of SGN a.
SGN A's a total of as percentage of revenue has has been as low as 38% in 28 team and that's the direction. That's directionally, we want to be back to I think it's going to take us a little while to get there and obviously as our topline. This has compressed we've seen deleveraging from an operating leverage perspective.
And so as we continue to grow that will help us as well, but if you look at the major components.
You know warehousing warehousing is running.
Close to 7% and that really should be at around 5% to below marketing is typically at around 10% to sales.
Selling expenses, it's typically around 7% to sales depending on product mix that's totally variable.
Product development typically runs at around 2% about sales and then you have edman for the balance around 15, 60%. So that gives you the cost structure effectively David.
Okay. Okay, great. Thank you.
Well make us last question operetta.
And our last question comes from Gerrick Johnson BMO capital markets.
Hey, good morning, again, so Brian wanted to keep it short I want to keep going.
Hey, tier two quick questions I guess Uh huh.
Fob versus domestic that's been influx or last couple of years should be shifting more to domestic first fob.
But how are things looking this year relative to last year on that.
Not shift between a ways of fulfilling and how is your your distribution system. How are you setting that up you know what are you planning for a in that regard and then just if you give you little bit more specific on what proportion of your stores, but your sell through on a retail basis were closed.
In the quarter, how that how many records the beginning hamner close at the end and how's that looking right now.
So on the Fob bus domestic Gary just for for context to everyone. On the line you know if you go back historically to around 2018.
Our fob was around 60% about sales domestic was around 40% give or take a few points either way for the longest period of time.
And that was with till you in the market in Indian 2019 thing shifted till you was it not around anymore, we had when our own issues in terms of bringing more in domestically and we had tariffs and we had the whole issue and debacle in 2019 as you know.
What we said at the time and what we've continued to say that we think a mix of around 50 50 is.
The right place for us to be there is obviously no specific rommel ride on so yes, the season negotiation between us and and retailers and it does depend on product lines, having said that in twentytwenty because of the launch inventory carry off a balance that we had we've seen for the first half of 2020, a much higher to me.
Stick verse Fob ratio, particularly because we've handled this inventory on hand, and we needed to actually cleared out so for the first half was 2020, how dumb ratio was 60% compared to 40% FOP now that will shift in Q3 is we'll ship some more if a beep.
But as online continues to grow in the industry and for spin Master, we'll we'll see a trend towards more dawn. So so I would say to you were planning to be at around 50, 50, I think will be slightly higher Dom for this year than than that target, but that's directionally, where we want to be.
In terms of store closures to be honest I know some about larger competitors actually track specific numbers of stores, but we actually don't have that data.
I would say to you.
Yeah from a commentary perspective, we've given you the data on our top three.
In the U.S. deak to department stores, and toy specialty stores have been very badly affected in Q2 as you know some of them are beginning to open some of them I never reopened in Europe in France, and Italy, where there's a much bigger.
Specialty market.
I think things are starting to reemerged there.
But again some may never reappear.
But we don't have the specific data Garrick that you may see from some of our how have the larger competitors.
Okay Fair enough. Thank you Mark appreciate it.
Okay.
So operator, I think that that concludes the call I'd like to thank everybody. We did go the extra time just to give you more information and more insight. We appreciate your interest and we look forward to seeing you in November for up to three results. Thanks, everyone. Thanks, guys.
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